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Harbor City Health Spa
Author(s):
Young, David W.
Functional Area(s):
   Management Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 4
Teaching Note: Available. 
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Harbor City Community Center
First Page and the Assignment Questions:

In March 2003, Ms. Liz Conaway, Administrator of the Harbor City Health Spa, expressed concern about Harbor City's cost accounting system. The extensive growth in membership that Harbor City had seen during its early years was leveling off, and Ms. Conaway wanted to prepare the Spa to become profitable, yet she lacked critical cost information.

At a meeting with Mr. Robert Simi, Harbor City's new accountant, Ms. Conaway outlined the principal issues:

First of all, our loss is increasing. We obviously have to reverse this trend if we're going to become solvent. But for that we have to know where our costs are. That leads to the second problem: we don't know the cost of each of the services we offer. I mean, our clients receive a variety of services, yet we charge everyone the same per-visit fee.

Ms. Conaway had added motivation for analyzing Harbor City's costs. Some new health spas were competing for Harbor City’s clients. To make sure that clients felt they were not being overcharged, Harbor City's fee schedule had to be reasonably related to costs.

BACKGROUND

Harbor City Health Spa was established in 1996, at a time when the residents of Palos Verdes, a residential community near Los Angeles, California, were becoming increasingly health conscious. The Spa provided comprehensive services to its clients, and had become increasingly popular as health concerns began to dominate the lives of the nearby communities.

Harbor City's initial funding came from a small group of investors, who contributed a total of $125,000. When its cash ran low in the early 2000s, the Harbor City took out a small loan. Because Ms. Conaway realized that the loan would need to be repaid soon, she intended to make the Spa self-sufficient as soon as possible. Harbor City's most recent financial statements are contained in Exhibit 1.

ORGANIZATION

The Spa had 22 paid employees. There were eight activity areas, that the center sometime called departments: Yoga, Aerobic Training, Nutrition Counseling, Seaweed/ Mud Soaks, Weight Clinic, Swimming, Nautilus Workouts, and Massage Therapy. In addition, the Spa had a Training and Education department (which saw no clients) and a Client Records department.

Nautilus Workout was an activity involving some considerable risk to clients. Hence, it was staffed by two part-time physical therapists and a full-time trainer. The Message Therapy service was for clients who Harbor City felt were not ready for vigorous activities. Seaweed mud soaks were a relatively new treatment modality for individuals with high stress.

Assignment

  1. What is the cost per visit for each activity?
  2. How might this information be used by Ms. Conaway?